Posts Tagged ‘Taxes’

There are some proposals afloat (from progressives naturally) to increase social security payments. Social security used to be enough to marginally live on with Medicare helping by reducing health care cost spikes. Social security is supposedly indexed for inflation but it’s clear that the index doesn’t measure the true cost of living. If you depend almost entirely on social security, you are either slipping into poverty or are already there. So conceptually Senator Elizabeth Warren’s idea looks like a good one. The money will get quickly spent anyhow, which will boost the economy. Of course either deficits will increase or taxes will need to be raised to pay for it. There’s no consensus to do either, so seniors (those that can) do their best to get by. In many cases they remain partially or fully employed while being “retired”. I see them all the time at the registers of my local Costco.

Social security was never designed to keep you fat and rich in retirement, just set a basic floor above the poverty line. The assumption was that the house and cars were paid off so it would allow you to live modestly where you were at. If you desired a richer standard of living, you drew off any pensions or retirement savings that you might have. Pensions are much better than retirement savings but turned out to be too expensive for many companies to continue to voluntarily fund. The alternative, when they were offered at all, was a 401K or similar retirement savings plan. Better employers match your contribution up to a certain amount. If you didn’t have a 401K plan at work, you still had the option of an Individual Retirement Account (IRA).

IRA’s sound good in principle too, but they require you to be proactive, i.e. regularly put a portion of your income aside. Worse, you shouldn’t touch the money. If you do touch it you must refund your account with interest and pay a penalty. The problem with an IRA was that even if you were methodical about putting money aside you couldn’t put a whole lot of it aside. This year you can put up to $5500 a year into a traditional or Roth IRA.

Assuming a middle class income of $50,000 a year or so, putting $5500 into an IRA amounts to ten percent of your salary, a high hurdle that most cannot make. But let’s say you manage to sock $5000 a year aside and do so for 40 years, something that would be excruciatingly hard for most of us with expenses like rent, car payments and childcare. Let’s say you somehow managed to earn six percent on the investment after fees. This means after forty years you would have $772,000 to help you live a nicer retirement. Is this enough?

You would think that the answer would be yes. Let’s say you expect to have thirty years in retirement, which means you could withdraw $25,700 a year over thirty years before running out of money. The amount you would get from social security would depend on how many years and how much you contributed to it. In 2011, the average social security check was $1180 a month. Without a pension or matching contributions from your employers to your 401K, this means an income of $3321 a month, or $40,000 a year.

Remember this is the best realistic case for a person that self funds their retirement because their employer won’t. It assumes a middle class wage earner, say a skilled mechanic, who is methodical about investing for retirement and can do so consistently. If your house is paid off do you think you can live comfortably on $40,000 a year in retirement? Most likely you are shaking your head. Since this is the best realistic case, your actual yearly retirement income is probably more like $20,000 to $30,000 with social security, absent other sources of income. No wonder I see so many grandmas and grandpas working at Costco. What they needed was a pension, but since their employer didn’t provide one they are making up the difference with a (probably part time) job at Costco. Costco at least provides a living wage, so perhaps they are supplementing their retirement income by $20,000. Maybe with working they have $50,000 in income per year. Is that enough to live on? Maybe, but you are working and not really retired.

My point is that 401Ks and IRAs are not viable retirement solutions for almost all of us, even with social security, although they were sold as real solutions. Moreover, social security income is not keeping up with the true cost of living. Sometimes even with a pension you don’t earn enough. This is the case with my brother in law. He retired some two decades ago on a community college pension where he worked programming the college’s mainframe computers. My sister (his wife) is in her sixties. He’s probably at or around seventy. She’s earning some money as an in-home health care aid, likely at less than $15 an hour. Last I heard he was helping manage a Disney store at Orlando International Airport. They get by, but at best they are partly retired.

We either have to give up the idea of ever really retiring or we need to find a way to fund retirement so that your retirement income is somewhere in the range of 70% to 80% of your pre-retirement income, which financial planners say you need to have something close to the same standard of living you had before retirement. To consider what a high hurdle that is, most financial planners (like ours) say not to withdraw more than 3% from your portfolio a year, at least if you want to maintain its value and have something to pass on or some extra savings to fall back on if you live to 100. This means if you want $60,000 in income per year from your retirement savings, you need to retire with a nest egg of $2,000,000. Yowza!

What we really needs are real pensions again. I know what you are thinking, “Isn’t social security a pension?” Well, yes, sort of, just a subsistence pension and it is funded jointly between the employer and the employee. It’s not a living pension, i.e. the sort of pension your parents or grandparents routinely got. Employers don’t have to provide pensions and most won’t. Moreover, many that did have pensions have reduced benefits or have turned the problem over to the government when the fund became insolvent. The real issue was that the private pension system became unworkable, mostly because Congress let it get that way. This doesn’t mean that a real public pension system couldn’t work instead.

Think of such a system as social security on steroids, or perhaps social security evolved. The problem is how to make such a system solvent. Asking employees to contribute too much more probably does not make much sense although many employees would be happy to contribute their 401K contributions toward a public pension system for a higher pension on retirement. Such a system could be funded through taxing employers more. Corporate taxes after all are a smaller and diminishing portion of total federal income, as corporations get increasingly clever at dodging these taxes. This means companies like General Electric pay virtually no federal income taxes. It shouldn’t be hard to have laws that would require GE to pay enough in taxes to fund a public pension for its employees. It would probably be pocket change to their overall profits.

Just as we have a graduated income tax where higher income taxpayers pay proportionally more of their income than lower income taxpayers, the same thing could work in the corporate (and non-profit) world to fund a public pension for all workers. It’s understood that Dollar General’s profits per employee would be lower than GE’s, so their taxes for funding a public pension system would be lower. The government actuaries would have responsibility for making sure it is doable. If some of GE’s contributions effectively go to prop up the pension of Dollar General employees, that’s perfectly fine as the costs are being socialized across the public at large. This is the way insurance works, after all. Companies will come and go but the government does not. If Dollar General goes belly up, whatever replaces it will pick up its slack.

So this is my solution. If this required funds to be invested in well-managed stocks or bonds, using a life cycle fund approach, I am fine with that, as long as those investing these funds are held to a fiduciary standard. Expecting that people can self-fund their own retirement anymore is unrealistic. I hope my analysis show why this is so. Someone has to pick up that slack.

Taxing the profits of corporations (similar payments would be needed from non-profits) for the purpose of public pensions could allow people to have actual retirements again, like your parents or grandparents had. We just have to choose to act.

I’m a bit anal about money. It probably comes from being a child of someone who lived through the Great Depression. So our retiring last year was a leap of faith. Of course being anal about money, I spent some time with our financial adviser basically to hear him tell me we could actually afford to retire. I retired, but didn’t quite believe it could last, particularly when we started spending thousands of dollars fixing up our house to sell it. The money going out far exceeded our retirement income.

April 29 is our settlement date, but will be important for another reason. On that day for the first time since at least 1981 I will be debt free. That’s because with settlement I won’t own a house anymore and thus won’t have to sweat the mortgage payment. Never mind I never technically owned it. I never got the mortgage balance to zero, although the balance is now under $20,000. With settlement the loan balance will be paid off. We expect a check for about $440,000, which will probably sit in a high yield checking account for a few months. Then it will go to purchase the next house.

We have no car loans and our home equity loan will be paid off at settlement. So we’ll be living totally debt free, assuming we don’t take out a mortgage on the next house. That’s our goal although we will probably draw from other savings to pay cash for our house to avoid a mortgage. Over the years we refinanced our current house twice, so our mortgage payment has lately been under $1200, and that includes escrow for property taxes. $1200 a month is very cheap housing in Northern Virginia, particularly since the next owner of our house is paying $505,000. Even with 20% down he will likely have a monthly mortgage payment in excess of $2500. Mortgage payments will hopefully soon becoming a distant memory for us.

No mortgage payment frees up a lot of cash, which is a good thing for many reasons. One reason is because when you are retired, you live on less money than you used to. To enjoy the same standard of living, you pretty much have to pay off your mortgage. Until recently I wasn’t confident that we could actually do it, and it has made me nervous. Now it’s becoming clear that we can actually retire without sacrificing our standard of living. More money will still go out for a while. Simply moving our stuff will cost us close to $5000. There will be settlement fees with the new house, perhaps a couple of thousand dollars. And there will be one time costs with moving into a new house, which mostly involves window treatments. Toward autumn though these should be in our past as well. With time I hope we can recoup these major one-time expenses.

I do know that when we move to Massachusetts we’ll be spending far less to live. Moving to “Taxachusetts” is supposed to be just the opposite, so much so that Massachusetts is frequently cited as one of the most expensive states to live. In our particular case, most of our income is my pension. Massachusetts won’t tax this income. Running the numbers today I quantified the savings: about $380 a month. These savings essentially continue until we are dead. Assuming we live 30 more years and never move out of Massachusetts, that’s $136,800 we can spend on something else.

With a new house under construction, we’ll be renting for three to four months. We’ll be paying $975 a month to rent a two bedroom, one bath apartment in Easthampton. Rent is not the same thing as a mortgage and since we are renting month to month we have no legal commitment beyond the end of the month. The landlord takes our rent and pays for the apartment’s upkeep as well as its property taxes. As a percentage of our monthly income, $975 will be hardly anything and much less than we pay to live in our current house, when you add in the other expenses like lawn care and water.

Of course it’s not quite that simple. We will eventually move into our house paid for with cash, but houses have expenses too. Our property taxes will be more, $15.80 per thousand dollars of assessed valuation, last time I checked Northampton’s property tax rate. We’ll pay more in property taxes in Massachusetts than we do in Virginia, about $1300 a year more. Property taxes alone should cost us around $620 a month, which is as much as a mortgage payment in many places. Since we’ll be in a condominium, we’ll pay about $350 a month to the condo association, compared to $62 a month we pay now to our homeowners’ association. However, the condo fee includes exterior maintenance, so I won’t have to worry about having the money to replace the siding or the roof. Electricity and water are likely to be more expensive as well, although many houses install solar panels and often get credits from the power company for putting electricity into the grid.

So there’s no way yet to fully quantify our net savings by relocating, retiring and selling our house, but it is likely to be substantial. I don’t expect that we’ll have more money to spend as retirees than when I was working and making more money. That will become clear in time. With a relatively fixed income it will become important to track expenses against a budget and regularly adjust our lifestyles accordingly. Not all costs can be anticipated. But it looks like on April 30 we will not only be debt free but retired both in body and spirit.

The tax code giveth and the tax code taketh. In 2014, the tax code tooketh, to the tune of about $3000 in checks I did not expect to write to the U.S. Treasury and Virginia Department of Taxation. Ouch! No one likes paying taxes and I don’t like paying mine anymore than anyone else, but I particularly didn’t like it this year when instead of getting refunds I was writing four figure checks. Because of my success in previous years I sort of assumed that it wouldn’t be a problem in 2014 either. So I kept things on autopilot. I didn’t change withholdings or exemptions. I figured it would sort itself out.

But it didn’t. And the answers of why I suddenly paid so much more in taxes when the tax rates haven’t changed were lessons for me and maybe for you too if you read this. What were the causes?

We lost an exemption when our daughter moved out. She was employed all year but lived with us until October. She paid for her automobile expenses but otherwise lived off house fare and got free rent. I assumed because we paid most of her expenses we could still claim her as an exemption. An exemption is worth almost $4000 off your taxable income. If you are in the 25% tax bracket like we are, that’s about $1000 in taxes. How much of her expenses we paid does not matter to the IRS. What matters is how much money she made and since she made more than $3,500 we could not claim her as a dependent. So in our benevolence to help her acquire the savings she needed to live independently, we were also taxed for the privilege. Ouch!

We started earning interest again. We put a lot of our cash into Ally Bank, an online bank, which pays about 1% interest. 1% interest is not much, but it beats the .01% we were getting through the credit union and USAA Savings Bank. It’s nice to earn interest, but it’s income so you have to report it. $219 in additional interest effectively cost us $53.50 in extra taxes.

When I retired I was paid for six weeks of accrued annual leave, a significant lump sum of money for which I was disproportionately taxed. There is wisdom in retiring on the first of the year. That way your lump sum applies to the next tax year when your income will be less. I didn’t do that and retired August 1. Despite our retirement for five months of 2014, our earned income was just $16,500 less than in 2013. This was largely due to the lump sum paid on my retirement.

My business income went up but I didn’t want to pay quarterly taxes on the income because of the paperwork hassle. It worked out in the past by making my four-digit tax refund three digits. This time it worked against me.

I could not claim my health saving account deduction. Last year I got the full $2500 credit. Since I wasn’t employed all year in 2014, I actually only put about $1700 into the HSA, but there is no requirement for money to accrue for it to be paid out. $2500 was paid out. The end result was that I could not claim the credit at all, so that effectively cost me $625 in taxes.

I hassled my wife to put money into her employer’s 401K while I kept putting money into her IRA. Because her 401K money was tax deferred, her IRA money was not. It’s good to save money but because it was not tax deferred it effectively cost us $812 in extra taxes. Hey, it seemed like a good idea at the time! On the plus side some day I will be able to take out the money we put in for 2014 and not pay tax on it.

Because I made more money consulting, I had to pay more self-employment taxes. Cost for the extra income: $128 in taxes.

Our mortgage is almost paid off, which means there is less of a mortgage interest deduction. That effectively meant $150 more in taxes.

We gave less to charity. This is mainly because my wife stopped going to her temple and feeding them regular checks. I didn’t think to make up the deduction with other charitable spending. This effectively cost us $566 in taxes.

The above was slightly offset by some good things: lower earned income, more consulting income and of course the pleasure of being retired. But I have learned that tax-planning vigilance is needed. Moreover, I learned that major life transitions can cost you a lot in taxes if you don’t anticipate them. When we lost an exemption, it was not entirely bad. We won’t be paying for our daughter’s expenses in the future.

2015 will not be any easier for us tax-wise, as we will be relocating and buying and selling homes. But it was clear that I was not withholding enough money for income taxes. I tried a number of online calculators but even the IRS’s calculator is really deficient. It turned out to be easier to estimate income, deductions and credits in a spreadsheet based on the fields in a 1040, calculate my estimated 2015 tax from it and then figure how much I needed to increase my withholding so not to end up in this situation again. It’s about $500 more a month.

With the arrival of Hurricane Sandy here on the east coast yesterday, you got a timely reminder of why we need government. Yesterday was a day when you wanted to batten down the hatches and if you lived in certain areas also pray like hell. Unless you own a boat or ship you probably didn’t have to literally batten down any hatches, although I have to wonder if failure to do so lead to the sinking of the HMS Bounty during the storm.

For most of us storm preparation meant cleaning out gutters, removing chairs from our decks, testing the sump pump, stocking up on batteries, toilet paper and bottled water, and finding places for our automobiles away from trees. It worked for us here in Oak Hill, Virginia. Sandy dumped more rain than wind on us. Nearby Washington Dulles International Airport reported 5.4 inches of rain during the event, with peak sustained winds of 39 miles an hour, with gusts to 54 miles an hour. We also had a day of record low pressure, something I attribute to climate change. As hurricanes go this was a bizarre one. No tropical air and foggy windows this time, but cold air fed by a cold front on the other side of the Appalachians, driving rain for more than a day, and blustery winds yesterday afternoon and evening. Our house, windows and floorboards rattled from time to time, but the power and heat stayed on and we never lost Internet.

News reports indicated that millions of others are still without power. Sandy left much of New Jersey and lower Manhattan destroyed and/or underwater. I am monitoring my hometown of Binghamton, which likely has not seen the worst of Sandy yet. The area suffered two devastating floods in 2005 and 2010. This may be yet another one for that suffering area to endure. But its impact will be softened, thanks to local, state and federal emergency managers. Thanks should also be given to President Obama, who declared areas disaster areas before the storm hit, to speed aid and supplies.

The list of people and organizations to thank are immense. There is the Federal Emergency Management Agency (FEMA), which coordinates disaster relief and works intimately with the states to stage disaster relief supplies. There is the National Weather Service and the National Hurricane Center, which effectively tracked the storm and issued the correct warnings. There is the Coast Guard, various governors, state and local emergency responders, power crews, ambulance drivers and cops on the beat.

Some of the best results were things that did not happen. My roof did not blow off or collapse. This did not happen by magic, but was the result of building codes and building inspections. In 1985 when my house was constructed, Fairfax County sent out inspectors to make sure my house was constructed to a code that would allow it to endure major storms like Sandy. In 1999 we replaced our deck and enclosed it. “Big government” building inspectors took a look at the roof of our new deck and told the contractors it was not up to code. They were forced to add additional beams to support the roof.

There is more evidence of big government across the street from my house. There a large dry pond sits awaiting events like Hurricane Sandy. It safely collects backwater then funnels it into the nearby creek in a measured manner, minimizing flood damage. Even in the event that it overfilled the dry pond, the codes required the road to be graded in a certain way to keep the water flowing gently downhill, never leaving a spot on the road for water to accumulate. Before the community was even constructed, an engineering study was ordered to make sure no part of our community was in a flood zone. Had these safeguards not been in place, it is likely that we would have experienced some storm damage last night. Possibly me and some of my neighbors would be dislocated, injured or dead. Big government could not eliminate these risks, but through a planning and an impartial inspection process it minimized these risks. One of the reasons our power never went out is because power lines are underground in our neighborhood, another outcome of big government. Doubtless it would have been cheaper to plant telephone polls instead.

Much of the wheels of government work this way. It’s the things that you don’t see and take for granted that minimize losses and deaths during these natural events. All these services cost money, but they cost less because their costs are borne generally through taxes. The cost per capita for the National Weather Service is a couple of dollars per year.

FEMA is an example of the services that Mitt Romney plans to drastically cut if he is elected president. And yet many of these services are already chronically underfunded and if anything need more funds. Moreover, the cost of funding these arguably essential areas of government are a pittance compared to the cost of entitlements and defense. At least now Romney claims says he won’t cut FEMA. But clearly you cannot balance a budget and not raise taxes if you don’t cut something. If you won’t do much to cut entitlements and keep bloating the Defense Department’s budget, these essential government services must be drastically cut.

You can say, as many conservatives do, it is better to leave it to the states to handle these things. But hurricanes do not respect state boundaries. It makes no sense for each state to have a redundant weather service when it can be done nationally. The whole point of having a United States is to ensure that if some states have to deal with disaster, we can pick up their slack by everyone contributing aid through federal taxes. We need these services because we are all in this together. These services are not nice to have; they are essential. We are bigger than the sum of our parts because we are united and federated.

Also essential is the infrastructure that makes all this possible. We need the National Science Foundation to stimulate research in national areas of interest. We need my agency, the U.S. Geological Survey, to do seismological research, biodiversity estimates and to monitor the nation’s streams and groundwater, so the National Weather Service can make flood and drought forecasts. We need the FDA to make sure our drugs are safe, agricultural inspectors to make sure our food is safe, ICE to handle illegal and legal immigrants, and the FBI to investigate intrastate crimes. Maybe if push came to shove we can do without funding Big Bird or sending probes to Mars. These costs are mere pocket change in the federal budget.

As I have noted before, taxes are the price of civilization. If this is not clear to you, then elect Republicans and watch as our highways and bridges deteriorate, our children become unable to afford college, watch our food become impure, our drugs become adulterated and see legions of poor and starving people living on the streets because no one will house them or feed them. Expect that when some future Hurricane Sandy arrives, the size of the problem will needlessly mushroom simply because we as a society have decided we have stopped caring for anyone but ourselves.

It’s your choice. I understand if your ideology tells you to vote Republican regardless, but the next Hurricane Sandy won’t care about your philosophy and you and your family may be needless victims. God gave us brains. Let’s use them.

Mitt Romney, the likely GOP nominee for president, is not sure but he thinks his tax rate was fifteen percent last year. We may or may not know in April when he may or may not release his tax returns for 2011. While we may or may not know his 2011 income and taxes, he seems much more reluctant to release tax returns for previous years, particularly when, you know, he was raking in the mega millions working for Bain Capital, where he made his fortune.

Mitt wants you to know his tax rate was probably fifteen percent last year because it was almost all unearned income, principally interest and dividends on his investments. This is, after all, a guy who says he knows the pain of unemployment because he is also unemployed. He says that he did have some earned income in 2011, mostly speeches, but it was “only” $374,000 dollars or so.

Poor guy. It’s a good thing he doesn’t have to live off just his earned income. Imagine his suffering! First of all, that would place him in the 33% tax bracket (35% is the maximum), which it might mean that instead of flying first class he might have to fly business class. By the way, his 33% tax rate doesn’t mean he paid 33% tax on all of that $374,000. First of all, taxable wages would be considerably less than $374,000, but he would only pay 33% on taxable income over $212,300. Income below this threshold would be taxed at a lower rate. In fact, for his first $17,000 in income, he would only pay a 10% income tax, just like me.

Unsurprisingly, my family does not come close to making $326,000 in earned income, but we are reasonably well off. Curious to see how I compared with Mitt, I pulled my 2010 income tax form. My wife and I fall into the 25% tax bracket, since our taxable income in 2010 was $104,345. Which means that Mitt Romney, whose net worth is estimated at between $190 and $250 million, is taxed at a lower rate than my wife and I. Ten percent lower, in fact.

Just for the record, I am releasing my tax returns (well, the first two pages, which is enough), which Mitt won’t do. Naturally I am obscuring some personal information, but as you can see we paid $16,589 in federal income taxes, after some substantial deductions and credits, on an adjusted gross income of $142,642.

If you want to understand why the 1% are doing so well and will continue to do well, it’s there is a nutshell. Essentially those who work are required to pay proportionally more of their income in federal taxes than those who don’t, at least if your taxable income is $17,000 or more (using 2011 tax rates). And $17,000 a year is essentially living in poverty.

Since Romney has not released his tax returns, we can only speculate about whether he is a shrewd investor or not. Most likely since he spends most of his time campaigning, he is not paying much attention to his stocks and mutual funds. It is unlikely that he is carefully moving his assets around from less productive companies to more productive ones, so that he can build wealth and presumably reward innovation in the economy. Most likely his funds stay largely the same from year to year, or he hires some smart person to manage his funds for him. In any event, regardless of how much he does or does not make on his investments, he pays just 15% income tax on that portion that is over $17,000, and none of it is earned. Presumably he is getting at least 5% interest on his portfolio, so probably this income amounts to no less than $10 million a year in interest and dividends, on which he pays no more than $1.5 million of that in federal income taxes.

Whereas I work forty or more hours a week, plus teach a class at a community college for some spare change, plus earn a couple grand with an online business I have. And my tax rate is 25% on taxable income over $69,000.

So if you have wealth you can effectively do nothing and pay less taxes as a percent of your income than someone whose source of income is likely almost completely earned and who makes more than $17,000 a year. Is America a great country, or what?

Yes, this is a great country, for those with wealth. It’s pretty clear why: because the rest of us subsidize their wealth. It’s not too surprising, if you think about it, that the wealth gap started growing almost as soon as we dropped taxes on capital gains and interest below top tax rates for income, which began during the Reagan Administration. The gap is currently twenty percent: with a top earned income tax rate of 35% vs. a top unearned income tax rate of 15%. To put it another way, unearned income is worth up to 233% more than earned income because it discounts your taxes by that much.

Supposedly this policy incentivizes capitalism. It’s proof that the fictional Gordon Gekko was right when he uttered, “Greed is good”. It certainly made him and people like Mitt Romney rich, but it’s clear that the money actually came from somewhere else. In the case of Bain Capital, it often came at the expense of shareholders in failing companies and workers who at best were asked to take a “haircut”, got stiffed on their pensions and/or found themselves out of a job. The plain facts are though that more of the costs of society are being borne by those who have a harder time paying for them. It’s not too surprising then that the wealth gap grows and more and more wage earners are falling out of the middle class. Their value has been discounted.

At a minimum, I believe that unearned income should be taxed at the same rate as earned income. This at least sets parity between these two forms of income. Most of us though intuitively understand that value added through the sweat of one’s brow should be valued more than income generated from having capital alone. All value begins with a human being making some physical change to the real world. If anything, these tax rates should be reversed and unearned income should be taxed higher than earned income.

Regardless of who wins the presidential contest this year, this inequity isn’t likely to be rectified, but it sure won’t happen if you elect Mitt Romney for president. Instead, you can expect that government for and by the wealthy will continue, and your vote for Mitt will be instrumental in ensuring that the value of your labor will continue to decline.

The temperature hit a record 105 degrees Friday at Washington Dulles International Airport, a new record. The temperature must have been at least as hot at the White House. There President Obama and House Speaker John Boehner were engaged in their latest discussion regarding raising the nation’s debt ceiling. Apparently tempers flared, Boehner left, and the president and speaker were left to give dueling press conferences to explain why the other side was being unreasonable. Meanwhile, social security recipients were anxiously wondering if they were going to get their checks on August 3rd.

The dueling press conferences were at least instructive in underscoring the fundamental issue of disagreement. It’s not the deficit that really matters, it’s not even the debt ceiling, and it’s not jobs or the state of our economy. It’s taxes. For House Republicans, the bottom line is no taxes must be raised, not even when our deficit is more than a trillion dollars a year. Unfortunately, they have boxed themselves in by claiming that debt and the deficit were more important when all along it was really about taxes. Now, as President Obama pointed out in his press conference, they are left with the inability to say yes.

To Republicans, the deficit is less important than no new taxes. It turns out that for them taxes trump everything. It used to be that Pentagon spending was sacrosanct for Republicans: how could we possibly endanger our national security? Well, not anymore: when push comes to shove they would rather reduce our military budget than raise a dime in new taxes. The logic gets fuzzy when it comes to agriculture subsidies and the like. In their minds, taking these away without adding subsidies somewhere else is a tax hike. Thus spake Grover Norquist. But cutting Pentagon spending in general, even though there is a huge defense community that depends on federal spending, is apparently okay if it avoids a tax hike.

The debt ceiling is fungible as well. Republicans are not opposed to raising the debt ceiling, but only if there are no new taxes and “savings” by cutting expenditures exceeds the amount by which the debt ceiling is raised. It is also fine to not pay our bills, bring the economy into depression, leave grandma without her social security check and raise our long-term borrowing costs rather than raise a single dime in new taxes.

One can arguably say that Republicans are crazy, but one cannot fault them for inconsistency. They mean what they say and they say what they mean unless, and this is a very big unless, they can have a sudden change of heart or Speaker Boehner can convince enough House Democrats and non-Tea Party Republicans to go for another deal.

So far Republicans have been remarkably tone deaf to their corporate masters, who are now telling them, “Okay, enough is enough. Time to sober up and compromise now.” Too bad these same corporate masters were not working to elect establishment Republicans rather than Tea Party Republicans last year. While they achieved their desire for a majority of Republicans in the House, it came at the expense of political accommodation, hitherto a necessary skill when there is divided government.

Yet, there is a power stronger than even Grover Norquist that Republicans have foolishly ignored until now, but they will discover on or around August 3rd if the debt ceiling is not raised. It is the power of senior citizens who depend on social security but who will not get it. It is the power of sixty million angry and desperate phone calls from hot-tempered grannies and gramps who, if they are mobile, will also be picketing outside their representative’s offices. You really don’t want to rile up these folks, because they were the ones who voted you into office, but they did so on the condition that you would not mess with their junk.

Politically, letting Republicans push us into default probably would help rather than hurt the president, providing it can be shown that he did everything possible to prevent a default. Given that the Senate has already rejected the House’s plan, this has already been demonstrated. The economic effect of default would likely be catastrophic, but the political effect would be to throw the Tea Party out in 2012, and likely lead to the demise of the Republican Party brand.

Still, there has to be one adult left in the room. If I were President Obama, and if push came to shove I would say that the 14th Amendment gives me the right to extend the debt ceiling unilaterally to cover all debts covered by law. I would also cross my fingers and hope that at the 11th hour that there were enough worthy creditors willing to loan us money to avoid default. I expect he has his lawyers all over the problem. That is his trump card that he will be forced to pull out only if all else fails.

Unless you live in the state of Virginia, you may have missed the news that our ubiquitous state owned ABC (Alcoholic Beverage Control) stores may be going the way of the dinosaur. Governor Bob McDonnell promised in his campaign to turn them over to the private sector. He says that the private sector would run liquor stores much more efficiently than the government. In addition, by selling more liquor these private stores would generate additional revenues to help address Virginia’s chronically under funded transportation system. This sure sounds sweet.

Yet, the governor recently ran the numbers again. Maybe turning over ABC stores to the private sector won’t be the VDOT’s salvation after all. While McDonnell swore he would not raise taxes, he did recently float the trial balloon of adding a “fee” to alcoholic beverages sold in the state. A “fee” apparently is not the same thing as a tax. This tax fee should help make up the $250 million dollars in revenues brought in across the state by these ABC stores. Wow! That’s a lot of fees!

It’s unclear to me what the advantage of turning over these ABC stores to the private sector actually is. Whether it does or does not save money seems to be beside the point. A good Republican, after all, believes that the private sector always operates more efficiently than the government. ABC stores were created after prohibition was repealed to control the hard liquor-drinking problem in the state as well as to assure that the state got its proper share of taxes on alcohol. If ABC stores are decommissioned, presumably, I could pick up a bottle of Jack Daniels at the local Shoppers Food Warehouse and save myself a trip to the state owned package store.

It strikes me that state owned package stores are just the tip of the “socialist” iceberg that enlightened Republicans could rid us of, thus giving us more freedom and keeping taxes low. Republicans in Congress, and particularly the Tea Party wing of the Republican Party, have their eyes on Social Security and Medicare. The latest groupthink seems to be that neither of these programs is sacrosanct and they can be “managed” by turning them into voucher programs. Send recipients vouchers and let them buy an annuity or old age health care with their voucher through this magic called shopping around for the best deal. If the voucher doesn’t quite cover living expenses to the same degree as the government has, well, that’s too bad but that’s better than “socialism”. At least costs are contained and thanks to the magic efficiency of the private sector, somehow people will be able to buy much more value with their vouchers than through some sort of “socialist” government-run program.

Republicans for years have been advocating for parents to use vouchers buy their way into private or charter schools instead of their local public school. Why settle for mediocre public schools, goes the thought, when some private charter school around the corner will give better results for less money? Likely, their staff would not belong to any stinking teachers’ union. This would help drive value, although it might also depress teachers’ wages.

Why stop with public schools? Why have public colleges or universities? Surely, the magic of the private sector can work its magic if they too were privatized. To a good Republican, even an institution as renown as Texas A&M should be on the chopping block. If the horror of socialism existing in our public schools can be dealt with through the magic of vouchers, surely “socialist” public colleges and universities can be run more efficiently as well if sold to the private sector. After all, tuition increases far exceed the cost of living. Something must be rotten in our public universities and competition is surely the solution.

Strangely, it doesn’t appear that private universities offer a better deal. The Washington Post, whose holding company also owns Kaplan University, calculated that students pay nearly four times as much from Kaplan for an associate’s degree in business administration as do students attending Northern Virginia Community College ($33,390 vs. $8500). It is also true that the state subsidizes NVCC and other public universities, but clearly not so much as to make up the staggering difference between NVCC and Kaplan. From all the evidence, it appears that public colleges and universities offer a much better value for students than private colleges and universities.

Clearly, NVCC is not in the business of making a profit, unlike Kaplan, whose shareholders want regular stock dividends. Kaplan may be targeting those who need more flexibility in their educational schedules and don’t mind paying extra for the privilege. Most students finance at least a portion of their education. Since our “socialist” governments seem to be in the student loan business, they are essentially funding many students’ private educations. Yet while nationwide only ten percent of college students go to private universities, 44% of student loan defaults happen to students attending private universities. Could it be that private universities care more about profits than whether their students actually graduate?

Nonetheless, public universities should be a choice target for Republicans. Why not just issue tuition vouchers for students to use where they want and privatize our public universities as well? Shouldn’t it just invigorate competition in the educational marketplace and thus drive down costs? Oddly, it just doesn’t seem to be working out that way. Private universities seem to be targeting the high-end market, not the low-end. It looks like outsourcing our public colleges and universities would only make college less affordable to those who need it the most. But when ideology is more important than facts, why be bothered? Think of all the money taxpayers could save by not maintaining those colleges, universities and public schools. Just give them a voucher if they whine and let people shop around!

If they return to power in November, there are all sorts of opportunities for Republicans to deliver on their privatization agenda. I was going to suggest that our public roads could be turned over to the private sector, but that’s already underway here in Northern Virginia, where High Occupancy Toll (HOT) lanes are being added to the Capital Beltway, ensuring that the well moneyed won’t have to deal with the inconvenience of traffic. VDOT can no longer be bothered to run the Dulles Toll Road, and turned it over to the local airport authority. Prisons are also being outsourced in many states; the Corrections Corporation of America apparently provides cells for many if not most Arizona prison inmates. In addition, as the Bush Administration demonstrated, war can largely be outsourced these days too. Ask Blackwater. Their stockholders did quite well in the last decade, although the value of their services looks suspect. Even the Obama Administration is getting into the outsourcing act. It wants the private sector to provide rockets to ferry astronauts into space. Curiously, most Republicans are against the idea. It’s probably because it was proposed by a Democrat.

In any event, we have just scratched the surface at innovative ways to reduce “socialism” here in America. It is true that Thomas Jefferson might roll in his grave at Monticello if his beloved public University of Virginia went private, but when it comes to ideology we must not let two hundred years of tradition and a dead president’s feelings stand in the way of innovating the private sector.

Why study history? After all, many people (particularly students) find history boring. However, there are excellent reasons for studying history. By observing our actions in the past and their effect we can predict with a fair amount of confidence whether they will work again. For example, based on our experience during the Great Depression, cutting spending lead to less economic activity and prolonged the Great Depression. Lesson: the government should keep spending in ways that stimulate the economy until a recovery is sustainable.

So what are we doing as we just begin to emerge from the Great Recession? Why, we are cutting spending! With history as our example, we now know that we are almost guaranteeing a double dip recession. Moreover, what we are cutting suggests profoundly stupid choices. It appears that whenever we finally emerge from our economic doldrums and near double-digit unemployment, our status of still being a superpower will be problematical.

It is easy to look at countries like Greece, which is in the midst of a terrible deficit-driven crisis, and figure we need to buckle down ourselves. Greece is buckling down, largely because it had no choice. Here is what austerity is also bringing in Greece: a sharp and marked drop in standards of living, a rise in already high unemployment rates, and credit that is hard to get and when available only at usury rates. There is also a lot of civil strife. Students, pensioners and government employees are marching in the streets. Rioters have already killed some people and damaged considerable property. Greece is on the edge of anarchy.

However, here in the United States both our “welfare state” and our total debt as a percentage of GDP is a fraction of Greece’s. This suggests we are in no danger immediate danger from excessive debt. In fact, as financial markets now look shaky again, even more money is flowing into U.S. Treasury bills. So our country is still seen as a safe haven for money, and our debt is seen as good debt, at least compared with other investments. Unlike in Greece, only a small percentage of us retiring at fifty-five or sixty are retiring on a pension. Most of those retiring are retiring only because they lost their jobs and no one will hire them.

Having lost their jobs, they have far less money in their pocket, so they are spending less. When people spend less and earn less, governments collect less in the way of taxes. For the most part, state and local governments cannot raise taxes enough to make up the difference, so they must cut services instead. And since states and local governments have little in the way of bloat, essential services are being cut. Firefighters, police and teachers that thought they had steady jobs are finding themselves unemployed. Here is a real trickledown effect. Because they have less to spend, retailers receive less and perhaps cut their workforce, or reduce hours. When retailers sell less, they need less from wholesalers who also cut jobs. When wholesalers need less, producers and manufacturers make less so they cut jobs. So the economic effect keeps trickling down, exacerbating unemployment, reducing tax revenues and extending our economic doldrums.

Moreover, our supposedly precious children are getting inferior educations. They are stuffed into classrooms with more students, lose opportunities for extracurricular activities and in at least 120 school districts have four-day school weeks. We will depend on their income in our own retirements, but it’s hard to understand how. By teaching them less today, they will likely be behind children in other countries. All these negative effects are because we are now alarmed over short-term deficits that it appears we can comfortably sustain over the short term.

If you have trouble starting your car, you might pump the accelerator hoping the engine will start. The same is true with our economy. What you don’t do is the moment it sputters to life stop giving it gas.

Deficits remain important in the long term. However, Republicans don’t seem to understand that raising taxes is a viable way to solve deficits. If deficits are truly more important than anything else is, then raising taxes has to be on the table. Otherwise, keeping taxes low is more important than deficits, which is the philosophy they have traditionally embraced. It is also important to get spending in line with revenues. But first things first. First the economy has to be vibrant enough so that economic activity reduces unemployment and drives wealth. When this happens, tax collections also increase, reducing deficits.

Unquestionably, we waste and misdirect much of our tax dollars. Our spending on war in Afghanistan is an egregious waste of money because it is a lost cause. A lot of the money given to the Afghan government instead lines the pockets of its largely corrupt Afghan officials. It also goes to pay off warlords who look the other way so our supply trucks carry cargo safely to remote locations. Aside from the wars in Iraq and Afghanistan, huge amounts of money are wasted within the Department of Defense. Secretary of Defense Robert Gates agrees. There is also huge waste in the Medicare system. Some of these expenditures, like building aircraft engines we don’t need, do feed American families. However, but they don’t go to buy things we need to make our country stronger and safer.

It’s pretty clear what we do need to do. We need to create jobs for the unemployed that will leave us with a stronger country. Jobs provide money, but also feed faith in the future. You don’t get there by laying off teachers, policemen and firemen. These are our first priorities, which is why it makes no sense for Republicans (and one turncoat Democrat) to kill a bill that keeps them employed. You also get there by building and rebuilding bridges and roads, funding innovative research for the 21st century and by investing in the educational needs of all our citizens, activities that are underway but where more money is likely needed. You don’t get there by cutting off unemployment benefits because people have been two years without a job. All that does is breed poverty and homelessness. However, if a chronically unemployed person at least has a check coming in, maybe he can pay his rent and buy food and clothing. That money stimulates a lot of economic activity.

You also raise taxes where it makes sense to do so. Aside from the poor economy, what is feeding the deficit? Mostly tax cuts that we gave to the richest Americans. These are people who can certainly afford to pay more taxes and in some cases genuinely want to pay more taxes. These huge tax cuts drove the problem that caused our deficits to explode. Certainly now is not the time to raise taxes on middle and lower income people, but those who can afford to pay more in taxes certainly should, particularly when richer Americans historically have paid much higher tax rates and still maintained a great standard of living.

Perhaps to achieve fiscal solvency it will be necessary to extend retirement ages or cut benefits in social programs like Medicare and Medicaid. These cuts become much more likely though in a hampered economy. I know my lifestyle would take a severe hit if I lived on half my income. The same is true with our government. A thriving economy will be the engine that creates this wealth again, as it did under Bill Clinton.

We need to spend more to get this economy moving again, even if the debt numbers look scary in the short term. Just as importantly, we need to spend wisely, investing on essentials like education, our state and local governments, and our infrastructure. Doing so prepares us for the economic challenges of the 21st century. To narrow the deficit, we need to repeal tax cuts given to the rich. At the very least, we need to redirect wasted money from places like Afghanistan into useful activities, like maintaining basic services for our citizens. What we do not need is what we have now: a panicky and foolish Congress that cannot see that their version of austerity is just another word for continued recession, unemployment and our quick descent into a second world country.

Does anyone like paying taxes? I doubt it. I don’t. Who would not want to give less of their hard earned money to the government? While like most Americans I don’t like paying taxes, I also understand that civilization (like freedom) is not free. So while I don’t like paying taxes, and know a lot of our tax money is wasted (something that should be addressed, of course), I prefer this to the alternative: anarchy.

During the recent snowstorms here in the Northeast, at one point I ended up with twenty-nine inches of snow on the roof of my deck. From my bedroom, I heard my deck’s support timbers creaking from time to time. I watched its roof warily and wondered if it was going to collapse under the weight of all that white stuff. Trying to shovel if off was not really an alternative, as there was no way to get a ladder into my backyard to even attempt it.

After I thought about it for a while, I recalled back to 1999 when we had the deck rebuilt and covered for the first time. I remembered how cranky the builders were when the county building inspector came over to check their work. Some of his requests seemed silly, like adding outdoor spotlights so people could come up the stairs safely in the dark. Others, it turned out, were spot on. One roof support beam every eighteen inches or so was not up to code, he told them. Double them. They grudgingly agreed, not like they had a choice. Likely because my county has competent building inspectors and modern building codes, the roof on my deck weathered a record snowfall.

I was thinking about this roof the other day when I read this article. The Consumer Products Safety Commission (CPSC) ruled that thousands of homes constructed with defective Chinese drywall must have the defective drywall gutted and replaced. In additional, the entire house’s electrical wires, fire alarms, gas pipes and even the circuit breakers must be replaced as well. The defective drywall has been linked to the corrosion of electrical wires and metal pipes, which mean that affected homeowners now also have to worry their house could catch on fire. Then there are the possible health effects including high levels of formaldehyde and sulfur dioxide that may be responsible for numerous reported cases of nose, throat and lung irritation registered by people living in these houses. Most of these houses are relatively new and include many houses that were reconstructed in the aftermath of Hurricane Katrina.

Imagine you are a homeowner with this problem. Think of the cost of gutting the entire inside of your house and rebuilding it. Think your insurance is going to cover it? My guess is, probably not. You might have some sort of home warranty that came with the house, and you might be able to use it to file a claim. Most likely, you will try to sue to recover the damages, probably by joining a class-action lawsuit. Meanwhile, you will probably cross your fingers that your house will not burn down or that you are not sent to the emergency room suffering from lung inflammation. Now that the government in finally on the case, CSPC chairman Inez Tenenbaum will be flying to China to seek redress from its government. Let’s hope the Chinese do the honorable thing.

We software engineers know that it can cost up to one hundred times as much to fix a problem after a system is delivered as it would be to get the requirement correct the first time. What software engineers know is true of most project-oriented endeavors, like building bridges or constructing houses. Clearly, had this Chinese drywall been known to have been defective it would never have been installed in U.S. homes. Maybe homeowners might have paid a little more for safe American-made drywall, but any homeowner now affected by bad drywall would certainly agree that they would rather have rather paid a little more than to have deal with the huge hassle, expense and health hazard before them.

The CPSC, like many ordinary federal agencies over the last few decades, has had reduced funding. Even the Obama Administration has given the CPSC short shrift, asking for $107 million for the agency in FY10. Congress to its credit realized this was niggardly, and partially because of another scandal (lead in toys produced in China), the CPSC’s budget for FY10 was increased to $136 million. It’s a hopeful trend, but as Consumer Reports has pointed out, the CPSC has been woefully under-funded for years. It appeared that the Bush Administration was trying to strangle it. Not surprisingly, with only 401 full time employees proposed for the agency in FY08, setting up and enforcing standards for safe drywall was on no one’s agenda.

Is government wasteful? Certainly, and there are many places where you can document huge waste and fraud, such as in fraudulent Medicare billing by many health care providers. Does that mean that government cannot provide useful and cost effective services? Absolutely not. I have no idea how much it might cost for the CPSC to create and enforce drywall standards. Let’s say it’s a million dollars a year. Even if it were ten times that much, our slightly higher taxes would more than pay for themselves in the assurance that our home are safer. The state cannot take on this responsibility. Inspecting cargo for compliance with our laws is a federal responsibility.

Perhaps in the Republican mindset, each homeowner would have their drywall independently tested by a private laboratory before having it installed or simply take their chances that they did not install defective drywall. In the real world, this is silly. This is why we have governments, because it makes no sense for every homeowner to do something like this when it can be done once by a government agency at the cost of chipping in a couple extra pennies a year in taxes. Moreover, that’s all it is. Even with a $136 million dollar budget, split among three hundred million Americans, we buy the safety we get from the CPSC for about forty-five cents per person per year. I know I would have no problem paying five dollars a year, or more, to have a lot more assurance that the products I purchase are safe. Nor would most Americans, if the argument were framed this way.

You get the government you are willing to pay for. If you are so insistent in restraining the size and cost of government, even if it means you or I may die because the government is not inspecting foreign drywall, then frankly, I think you are letting ideology override common sense. Perhaps it is time to move to Angola, where you are unencumbered by taxes. As for me, this is why I pay taxes. I am happy to pay whatever taxes are needed to ensure our products are safe. It’s crazy that so many Americans are even disputing this!

In case you haven’t heard, not only does Massachusetts have a new senator-elect, but Virginia has a new Governor. Bob McDonnell, your typical grey haired white Republican male with a toothy smile and a blonde arm candy wife was sworn in a week ago. He won election by promising no new taxes (a position few find hard to argue with) but also by promising all these new services. Yes, he has a four billion dollar budget hole to fill, but somehow he’s going to cut spending and add services. This includes increasing funds to the Virginia Department of Transportation, which is already decades behind where it needs to be in providing sufficient roads to handle Virginia’s burgeoning population.

Good luck with that, Governor McDonnell. Not that I am wishing you any bad luck or anything, but you are hardly the first governor, Republican or Democratic, to promise all these magical new services without raising any additional taxes. In a way, it’s an easy promise to make. After all, you don’t have to worry about reelection. Virginia governors can only serve one term.

I guess it wouldn’t work to tell voters the truth: that state services, already cut to the bone, have zero fat in them already. To close the four billion dollar gap outgoing Governor Tim Kaine outlined, most residents are going to squeal when they see what it actually means. Virginia’s total budget is around $38 billion, so $4 billion is hardly a drop in the bucket and amounts to about ten percent of the budget. I doesn’t take an accountant to figure out that if you are not going to raise taxes, you are going to add services and you already have a large projected deficit, then you are going to have to further cut services somewhere. You already promised to give more money to transportation and increase the portion of state money given to fund teacher salaries. The only problem is that both the easy and the hard cuts were made years ago.

How crazy has it gotten? The last cut to VDOT budget was $42 million from the road maintenance fund. How much is Fairfax County getting from the state for road maintenance this year? Zero dollars. That’s right, despite being the most prosperous county in the state as well as providing more tax revenue to the state than any other county as well as tons of revenue in gas taxes which is supposed to go for things like highway maintenance, we will get zero dollars for maintenance. So either we just let the potholes get bigger or we raise county taxes to pay to fix potholes which hitherto has been at least partially a state responsibility.

Now as a frequent driver, I’m all for changing this, so I think it’s great that our new governor is going to add to VDOT’s funding but I just don’t see where the money is going to come from. Education, health and human services, and transportation, in that order, are the biggest consumers of state tax dollars. It doesn’t look like education will be cut, unless it is subsidies to state universities, which have already been dramatically reduced and have students howling over their tuition rate increases. You say that transportation will get more funding which leaves human services as a likely place to use your budget knife. These services of course have already been pared to the bone. It’s hard to see how you reduce spending more there. It’s not like Medicaid is optional. It’s a nice gesture that you and your senior staff are going to be taking pay cuts, but that’s all it is and will do almost nothing to address a four billion dollar shortfall.

As best I can tell, you are pinning your hopes on two scenarios. One: the overall economy will improve to the point where more tax revenues come in. I would not take that one to the bank at least for a year or two. The other is your hope to sell oil leases off Virginia’s coast in 2011 and using some of that money to fund the state budget. I’d say the odds are pretty long there too. First, you have to get the federal government to agree to do this. Second, you have to hope that oil companies will be willing to front the money. Lastly, you are assuming that environmentalists won’t tangle this up in the courts for years.

So good luck governor but as Virginia is not licensed to print money, it’s pretty easy to see what’s going to give. Since you promised not to raise any taxes, it likely means that our overstretched state services are going to be more overstretched, which is to say the state will have to stop doing stuff that states typically do and we’re already pretty much giving up on road maintenance. I think it is much more likely that you will find reason to consolidate prisons and let non-violent prisoners out early in an attempt to make your budget math work. You just have to hope Virginia voters do not notice. As costly as prisons are, you still won’t be able to cough up four billion dollars in savings from them.

One promise I can make is that when you leave office in four years we will be lucky if our transportation funding is where it is now and our public school teachers do not have an extra four or five pupils in their classes. As for my fellow Virginians, shame on us for falling for these lies once again. Just once, I’d like to hear a Republican run for office promising no lower taxes and fewer services because that’s what it always means. Virginians would be well advised to buy extra heavy-duty shock absorbers for our cars. There will be many bumpy days ahead.

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